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India finance minister commits to strict fiscal roadmap

[DAVOS] India will not stray from a plan to slash its fiscal deficit to 3 per cent of gross domestic product within two years, Finance Minister Arun Jaitley said on Thursday, despite top aides' advice to revive the economy with more infrastructure spending.

Mr Jaitley, who will present his first full-year budget on Feb 28 for the 2015/16 financial year, said the current level of deficit was unacceptable.

"We have a roadmap to bring it (fiscal deficit) down a little below 3 per cent over the next couple of years and then we intend to maintain it," Mr Jaitley said at an event in Davos.

The government is scrambling to contain the fiscal deficit at 4.1 per cent of GDP in the fiscal year ending March, after a sharp shortfall in revenue that forced him to rein in spending.

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India's fiscal deficit touched 5.25 trillion rupees (US$85.09 billion), or 99 per cent of the full year's deficit target, in November.

In his budget, Mr Jaitley is widely expected to announce cuts in subsidies while allocating more funds for infrastructure, reflecting a rightward shift in economic thinking since Prime Minister Narendra Modi was elected in May.

Helped by falling oil prices that have reduced the bill to subsidise fuel, the government has roughly halved expenditure growth this fiscal year.

The government's top two economic advisers, Arvind Panagariya and Arvind Sumbramanian, have both advocated loosening deficit targets to allow public spending on infrastructure to jumpstart economic growth.

India's economy is recovering from its longest slowdown since the 1980s, but demand and investment remain weak.

Mr Modi and Mr Jaitley seem determined to spend more on roads and railways but, despite the views of their advisers, without breaking deficit commitments. The three top agencies place India on the lowest rung of investment grade for its debt.

Mr Jaitley, who is leading the delegation to Davos, said the government wanted to reduce its subsidy bill, estimated at around 2 per cent of GDP, and transfer funds to other sectors. "That is the area where we intend to move in order to cut down some part of the expenditure, in order to finance our own activities."

Last week, Mr Modi said his government would control expenditure by cutting "subsidy leakages, not subsidies themselves".

However, a panel appointed by Mr Modi this week recommended scaling back a food welfare programme, a move that would likely meet resistance from left-leaning parties.

Mr Jaitley ruled out abolishing subsidies from Asia's third-largest economy, which is home to one third of world's poor. He said the government would take necessary steps to return the economy to 8-9 per cent growth.

He said he would simplify taxes, but would not raise even "a rupee in budget from aggressive taxation".